Australia economy retracts for 1st time in 5 years

RachelPannett

SYDNEY--Australia's economy recorded its first negative quarter of growth since early 2011, raising the prospect that the longest ongoing winning streak in the developed world may be coming to an end.

Gross domestic product, the broadest measure of economic output, fell 0.5% in the three months through September from the quarter before. The resource-rich economy expanded 1.8% from a year earlier, the slowest pace in more than three years. Economists surveyed by The Wall Street Journal expected the economy to contract by 0.1% from the previous quarter and grow by 2.2% from a year earlier.

Australia has been enjoying the longest economic expansion in the developed world today--25 years and counting. But the commodity boom that underpinned its growth is ending. Other resource-reliant economies are tumbling into recession. Resource companies have shed thousands of workers as mining projects were completed, while others were scrapped.

Some economists say a shift in investment away from mining and into other industries such as services appears to have stalled. Australian companies scaled back investment spending by 4.0% in the three months through September compared with the previous quarter.

"The transition towards non-mining investment is taking place at a snail's pace," Capital Economics said in a recent note.

Most economists, and the country's central bank, think Australia has headroom to avoid a recession.

"While a contraction will no doubt invite talk of a recession...we, like the Reserve Bank of Australia, see growth bouncing back again," Shane Oliver, Sydney-based chief economist at AMP Capital Investors--one of Australia's biggest fund managers--said ahead of Wednesday's growth data.

Still, cracks are appearing in the economy. While Australia's jobless rate has fallen recently, many of the new jobs being created are part-time positions in service jobs, such as cashiers and baristas. That is contributing to the worst wage growth on record and stubbornly low overall inflation, since wages are a major business cost. The labor participation rate--the share of Australians either working or actively looking for work--has slumped to a decade low.

Meanwhile, record-low interest rates--currently at 1.5%--have fanned a property investment boom, with high-rise apartments sprouting up in previously downtrodden suburbs of big east coast cities like Sydney. Foreign investors have played a major role in driving up prices for everything from waterfront homes to cramped studio apartments. Economists and the central bank now worry about a possible glut of new apartments, which could weigh on prices and hit borrowers who have taken on record high levels of debt.

At the same time, industries such as manufacturing--which once supplied a steady stream of full-time jobs--have struggled to rebound after the mining boom drove up the Australian dollar, which made it costlier to produce goods locally.

U.S. food company General Mills Inc., which makes everything from Betty Crocker cake mixes to Latina pasta sauces and Old El Paso Mexican foods, recently said it would close one Australian manufacturing plant, in Victoria state, and shift some production to its Sydney factory.

General Mills is cutting as many as 600 jobs globally as it struggles to boost sales, as customers shift to less-processed and sugary foods. The company, which expanded its Mt. Waverley facility in suburban Melbourne only three years ago, creating 40 new jobs, said in a statement last month it was simplifying its supply chain to "secure the future growth of the business."

A generation of Australians has grown up without the pain of rising unemployment and widespread business failures. The last time the country underwent a recession--commonly defined as two straight quarters of contraction--was in the early 1990s, when interest rates were raised to 18% to head off a credit boom. The country's jobless rate peaked at 11.2%, double the current level.

Reserve Bank of Australia Gov. Philip Lowe said Tuesday the economy was likely to slow in the final months of 2016 before picking up again. Commodity prices have recovered recently "providing a boost to national income," although they remain much lower than they have been in recent years, Mr. Lowe said, as he said official rates would remain unchanged for a fourth-straight month.

Some economists are more pessimistic. Citi Research economists said the central bank governor's remark Tuesday about growth picking up again after slowing into the year's end is "very much a forecast."

"The sharper-than-expected slowdown may be temporary, but equally it may not," Citi said in a note ahead of the GDP data.

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